Part 1: Introduction – Buying Websites

buying websites

by nhussein · 0 comments

In this article we’ll take a look at online real estate, what it comprises, and the benefits and risks of investing in it. This is still a relatively new market and, whilst you’ve missed the first wave of the gold rush and even subsequent ones, there are still wonderful opportunities to invest in online real estate and make good returns. And there are also plenty of “opportunities” to become the victim of an unscrupulous trader.

What is online real estate?

Real estate in the bricks and mortar (B&M) world consists of all sorts of properties – both commercial and domestic. The market includes premises in various sectors such as retail, manufacturing, office space, and homes. These properties are assets that can be bought, sold, leased, let, or put to use by the owner. Investors buy real estate in the hope of gaining a higher return on investment (ROI) than they would be able to earn by investing their capital elsewhere. This is an old market and one which most people are already familiar with.

In the last decade or so, a new “real estate” market has sprung up online. Like B&M real estate, online real estate consists of many different types of property: websites, domains, email lists, and social media properties such as Facebook pages are some examples. Again like traditional real estate, those assets can be bought and sold, leased, let, or put to use by the owner.

But let’s be clear about one thing. Just because the assets are virtual, doesn’t mean this is about play money. Some virtual real estate can be worth hundreds of thousands of dollars, millions even. The domain sex.com is reputed to have sold for $13 million in 2010. Facebook’s IPO in 2012 raised $16 billion, the third largest in U.S. history.
These headline-grabbing transactions obviously are not everyday occurrences. But they serve as a reminder that big money can change hands in the VRE market. And people trade in virtual real estate every day in this active marketplace, just as they trade in B&M properties.

There are several clear parallels between the B&M and virtual real estate worlds. For instance, take the difference between investing in a website and investing in an online business. In B&M business terms, it’s very similar to the difference between investing in a unit in a shopping mall and investing in a store that’s actually trading. A shop unit is just a structure to house a business, not an actual business.

Yet many people seem to think that to buy a website is to buy a business. It isn’t. Just as a B&M venture needs a viable business model to be profitable, so too does an online business. There are plenty of websites which are not viable businesses at all, so don’t make the mistake of thinking that buying a website automatically makes you a business owner.
That said, the vast majority of online businesses are based on a website (or websites). It’s possible in theory to build up an online business without a website – for example by basing it on email marketing – but having an associated website generally makes it much easier. It’s reasonable to assume that anyone interested in investing in virtual real estate will need to learn about buying websites fairly early in their investment journey.

Similarly, you can avoid having to buy a website by starting from scratch and building your own. However, there are several advantages to starting out with an already profitable business. We’ll get into these in more depth later as well as the general pros and cons of owning online real estate.

Before we go any further, let me tell you a story.

Bert’s Retirement Dream

A man, we’ll call him Bert, had worked hard for a company for many years. During this time, each month he had diligently put by some money into the company’s 401(k) retirement savings plan.
Bert was looking forward to a comfortable retirement with a reliable income coming in each month. His 401(k) had recently paid out $100,000 and he was excited and optimistic about embarking on his new life. As he saw it, the 401(k) payout would buy him his financial freedom.

Bert liked the sound of doing something to give him an interest during his retirement years. The idea of running an online business appealed to him and it seemed to tick all the necessary boxes. He didn’t want to work for someone else. He had fairly modest needs and figured he could be happy making a few thousand dollars each month in passive income. Buying a website seemed like the ideal solution.

So ideal, in fact, that he went straight over to Flippa and started bidding on one of the first websites he saw which seemed to fit the bill. After all, he thought, all business is a risk to some extent so he might as well get started as an online entrepreneur straight away.

Buying a website at auction can be an easy process and so, within only a few days, Bert was delighted to learn that he’d won the auction with a bid of around $90k. He was the new owner of the website that was intended to be the key to his future financial independence.

And then came the rude awakening. It soon became apparent, even to Bert’s untrained eye, that he had bought a dud. Reality had quickly turned into a nightmare and Bert’s savings had vanished along with the dreams as wisps of mist on the wind.

True or not?

First let me ask you what you thought about the story. Did you believe it? Did you think that it couldn’t possibly be true?
The sad thing is that this story is not only true, it’s surprisingly common. It happens most days. And Bert wasn’t particularly stupid (although, with hindsight, it’s easy to say he was). He was a bit too trusting, perhaps. Too ready to believe how easy it is to make money online. He didn’t have his eyes open wide enough to spot when things seemed too good to be true. He saw what he thought was an opportunity and he went for it. After all, he thought, that’s what entrepreneurs do. They take risks. And there are people buying and selling websites all the time. It can’t be that difficult, or there wouldn’t be so many people doing it.

Perhaps the story led you to ask some questions. Did Bert have any business experience? Any investment experience? What sort of checks or due diligence did he do before he rushed in to the deal? The answer to all these questions is the same: none.
In which case, you might reasonably ask why this man – who lacked any experience at all of running a business, owning a website, or evaluating investments – risked his entire retirement fund on what might as well have been one throw of the dice.
There are plenty of traps lying in wait for aspiring online business owners. Bert was easy prey and fell into some that would seem blindly obvious to anyone with a bit more business savvy. But don’t get too complacent – some traps can be very cleverly disguised and can catch even experienced buyers. How can you be sure you won’t fall for any of those?

Well, you can never be 100% sure, but read on and learn more about avoiding the traps if you want to drastically reduce your chances of suffering the same fate as Bert.

What went wrong?

We’ve already identified some of the most obvious mistakes that Bert made. He had no experience at all of running a business, let alone an online one. Why he thought that buying a website would suddenly and immediately endow him with all the skills and experience required to run a business is something known only to him.

He didn’t do any rigorous checking and verification of the business’s financials or performance. When questioned about this afterwards, he replied that “the figures looked legit”. How he reached that conclusion must now remain a mystery as Bert was too embarrassed to be seen again in public after his brief misadventure into online business.

Bert didn’t understand risk, how to assess it, or how to reduce it. He didn’t understand the difference between taking a calculated and well-judged risk and doing something as crazy as gambling his retirement fund on something he knew nothing about.

He didn’t have any kind of alarm system wired up in his brain. Most people have an in-built detector which sets alarm bells ringing when something sounds a bit odd or too good to be true. Bert didn’t seem to have any such detector at all. Everything looked “legit” to him even when it would have had most people running for the hills.

Similarly, he didn’t have any red flags to wave. Most people in the business talk about things which don’t look right as “raising red flags”. Sometimes it can be routine quick checks which raise the red flags, sometimes it’s experience – for example, knowing a business ratio looks wrong for a particular industry – and other times it’s just sheer gut instinct. Something doesn’t “smell” right. The buyer can’t even say exactly why, they just know it doesn’t. And that can be enough for them to walk away from the deal, or at the very least start asking more questions and analyzing every answer in more depth than usual.

Another mistake that Bert made was to go straight to Flippa to find his target website to buy. Flippa is probably the best known auction marketplace where websites are bought and sold. But proper due diligence on an expensive potential investment may take more time than the auction allows – and if you don’t win the auction, the money you’ve spent on due diligence is still lost to you.

Bert might have been better to go through a broker to facilitate his purchase. Certainly, there are several brokers who work in the price range in this example. Not only did he not consider using a broker, he also seemed to be completely unaware of the numerous places other than Flippa where he could have found a website to purchase.
And finally (for now) Bert had another important failing. He had no understanding at all of the market he was getting into, and how it works.

Despite all these warnings, you – as a potential buyer – should not be completely put off investing in virtual real estate. There are many benefits too. It’s just a case of understanding what you’re getting into, and going into it with your eyes open.

What are the benefits of investing in online real estate?

As with any type of investment, investing in virtual real estate is a personal thing and what’s right for you depends on your own particular circumstances.

In some cases it can be less expensive to buy an online business compared to its B&M counterpart. Sometimes online businesses sell for lower multiples of annual earnings because the risk is greater or because a certain skill set is required to run the business. Here there are no “right” and “wrong” answers, only what’s right or wrong for you personally.

There are also different reasons to buy an online business. Some people desire the laptop lifestyle – which is achievable, but often not in the way that this dream is usually sold. Some people are happy to work in their own business and pay themselves the equivalent of the salary they could earn by working elsewhere. And others don’t want to be involved in the business day-to-day at all. They want a return on their capital and reward for their risk. They would be equally happy with any other type of investment based on the same criteria and outcomes.

What are the risks of investing in online real estate?

There are also plenty of risks in investing in online business. We’ve already seen several of the pitfalls, and these are even without taking into account various dirty tricks that go on in the marketplace.

Sometimes sellers can misrepresent the business they’re selling. This ranges from accidental inaccuracy to blatant fraud. It covers many sins such as shill bidding, artificially inflated figures, deliberate attempts to fool inexperienced buyers, and more.

It’s also possible that the business is legitimate, but the seller isn’t – so you hand over your money in good faith, only to find that the seller had no right to sell and your new investment doesn’t legally belong to you.

Or the business may be legitimate, but the market is about to change – whether it’s a change in trading laws, or a third-party supplier going bust, or a competitor launching a superior product.

Your job is to know enough so you don’t get fooled – by others or by yourself – into buying a dud.

Dodging the duds

Buying a website is like online dating

Have you ever looked at an online dating website?

When browsing for potential dates, you are invited to select from gorgeous-looking guys or gals. All of them, of course, are wonderful, witty, and wise. Their sporting prowess would be the envy of many Olympic athletes. Their interests are wide-ranging and limitless, including space travel in their private rocket ship, riding naked around their extensive estate with a herd of wild ponies, founding schools for disadvantaged squid, writing best-selling cookbooks and collecting classic cars. And, by the way, don’t forget that they’re all billionaires who make more money than they can spend. Needless to say, it’s all passive income too so they spend a lot of time lying on exotic beaches.

And the really amazing thing is, you can have your choice of any of them. Just pick one (or more) and they’re yours if you want them.

Yes, it all seems too good to be true. Reality can be very different.

It’s pretty much the same with buying websites. Often with similar results. So, how can you avoid getting into this situation? How can you dodge the duds?

Look in the right places

First, you need to be looking in the right places to find your ideal site to buy. Know which places specialize in selling rubbish to newbies. Know where the good sellers go. Get an understanding of the marketplace before jumping in to buy a site.
For starters, get over the mindset of thinking that Flippa is the place for buying sites, or even the best place to start. By all means consider using Flippa if it’s selling what you want to buy, but at least be aware that it’s not the only option – it’s not even the only auction marketplace. You might also want to consider brokers and forum listings. Sometimes buyers find they get the best deals when they buy websites that aren’t even for sale.

Learn how to spot the obvious tricks

Some “site for sale” listings can take an experienced buyer all of five minutes to spot what’s obviously wrong with them. Even without delving into the stats for traffic and earnings, it can be clear at a glance that something is wrong. Either it doesn’t quite “add up” or it could be that the figures are so outside industry norms that they beggar belief.

Some of the ability to spot danger signs comes with experience. You can also use checklists to help you avoid some of the most common tricks. Better still, you can learn a bit about the due diligence process. Even learning about what makes experienced buyers raise a red flag will help you to become more confident about spotting the suspicious things yourself.

Understand due diligence

Let’s get this clear up front: you can’t become an expert in due diligence just by reading an article. Sometimes it takes years of experience and/or studying to reach that stage. What you can do is to understand what due diligence is, why it’s necessary, what the process involves, and how to go about doing it.

For now, a basic grounding in the subject will go a long way to helping you choose the right website to invest in. It’ll enable you to weed out the complete rubbish and mean you won’t have to cry for help with almost every site you fancy. (Or worse, cry for help after you’ve gambled and lost.) Knowing about due diligence means you’ll be able to do a lot more for yourself initially, before moving on to tackling more in-depth analysis – if that’s what you want to do.

What’s next?

The next four articles in this five-part series go into more depth about each of these ways of avoiding the duds. In Part 2, we’ll be looking at how to decide what sort of website meets your requirements, what abilities and resources you can put into a website, and where you can go looking for the right website for you.

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nhussein

Managing Partner at VRETycoons

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