Buying domain names can be an obsession. As we have seen recently Verisign is worth billions, and .org is now worth billions also, because of the amazing potential and possibly profit to be made owning domain names. I have seen similar attributes in investing in oil and gas wells, land and acreage.
It all happens because we assign real money to potential value, even if never realized.
When I used to evaluate tax advantaged investment for clients in the late 80’s, like oil wells, we would evaluate oil wells and fields based on certain categories.
For oil, this meant proved producing reserves, the best asset, oil coming out of the ground, measurable and thus somewhat predictable. In the domain business this is revenue names (either leased, or parked, or with profitable landers). The goal was to accurately assess the predictability of the revenue, how fast was the well being emptied out. Much like a parking name, will the past numbers continue, increase, decline.
Next came proved non producing reserves. You knew the oil was there, but you needed to fund and drill the well and start production. In domain names, everyone is searching for these, mostly in expired names that look like they have traffic. Few of these exist. The competition is increased. The more factors that almost guarantee traffic and revenue, the more buyers pay to get the name.
Normally a seller wouldn’t sell a well, or in our case a name, with these attributes unless they didn’t know, or didn’t care. That is where the expired names come in, you assume the owner has disappeared, or left. Now its up to you and the other investors to bid it out for the name.
Many names, because of their scarcity and attributes, can be considered “proven”. We have categories like LLL, NNNN, Cities, Dictionary Words, Vanity Names and chinese letter combinations. There is demand, and scarcity and hypothetical wholesale values. When buying and selling these types of names, cash is king. Find a motivated seller at the right time and you can buy a $10,000-100,000 name for 20-70% less. Or, for the best names, outbid everyone and own the best. Secondly, you make money in the area by correctly assessing the ceiling for the name.
For me, not all $20k-100k names are equal. Some have the potential to be $1,000,000 names, some don’t. Buying right and being patient and evaluating offers is best applied to names with the greatest potential. One mistake many investors make is to over-estimate their proven value. We want a reg fee name or low bid name to be “gold”, when its not.
Now we get to biggest part of our market. In oil it was “potential” reserves. You may have had some seismic reading and test wells that showed there “might” be oil on your land or lease. In domain name investing this is simply our identifying that a name “may” have a buyer out there. We convince ourselves that buyer doesn’t know its for sale and hasn’t bought it yet…. but will once we own it.
Right now appraisals rule the roost in this area. We have stopped trusting our own instincts and we would rather go off data. We use Godaddy and other estimates of valuation to “invest” in potentially valuable names.
Then there is the last category, hypothetical reserves. Ok. I made this one up. In oil and gas this was the world of the wildcatter. If it was likely oil existed, the big companies probably already were involved. As an independent, you had to find places that hadn’t been scouted to be proved or have potential. Big risk and big reward.
The thought here has been, “someone” said I’ll sell 1-2% a year. But that was when there were only 10-30 million names registered. Now there are 150,000,000 in .com.
The odds aren’t the same.
I like domaining because there is always the potential for little risk, big reward. But I have also learned not always in scale. Unless you have a specific plan to develop big groups of names, the cost of buying potential names can moderate the profits from good decisions and flips, or even luck. Challenge yourself to be in the best areas, where you have an advantage in either knowledge from actual sales, or a less competitive bidding environment.
My best advice is be diversified. I’d encourage you not have all you investment in wildcat names. Have some with proven producing value and implied proven value. Happy Domaining.