The biggest issue that keeps people from investing in websites is knowledge. How do you determine the worth of a website? Do you only look at the money it earns per month? Or are there other factors that can play a role? Should you hire a broker or do all the evaluating and bidding yourself?

Here are eight tips that can make the difference between making a great investment and buying a site that is not worth a single cent.

1. Start Low

Yes, that $50,000 Dollar website looks tempting. It might be a good investment. But what you need at the very beginning is experience. Look at websites that are sold at a lower price range. So what’s a good starting point? This depends largely on your budget. My suggestion would be to start with a website for less than $1,000 Dollars. You will get valuable experience out of this first deal. You make your first negotiation, understand how payments are made, how websites and domains are transferred to you and how to setup the website on your server or web hosting account.

Delays or downtimes, which may happen during the process, do not hurt you that much as well. Imagine a 24 hour downtime because of an error in the site’s DNS configuration. Would you prefer that to be your 50,000 Dollar site, or your 1,000 Dollar site?

Verdict: Start with a low site or two before you dive head first in your first four, five or six K investment.

2. The Price

A website is worth as much as the buyer is willing to pay for it. It is difficulty to determine the price, especially in the beginning. A good rule of thumb for PPC kind of sites (like Adsense) is to multiple the average monthly earnings of the last six months by the factor twelve. Make sure to adjust extreme values accordingly. Those are usually one-time peaks that should not be part of the calculation.

Adjust the price if you have analyzed the website in question and came to the conclusion that you can make changes to it to earn more than that average. This can be the case if the site uses bad ad placements for instance or if ads are missing on some of the site’s pages.

Verdict: Pay up to twelve times the average earnings of the last six months. Adjust that by the website’s optimization potential.

3. The Traffic

Some webmasters might say that there is no bad traffic. I’d have to disagree with that when it comes to buying websites. There are basically four types of traffic:

• Direct Traffic, that is visitors who enter the site url directly or open the site from their bookmarks.
• Search Engine Traffic, traffic from organic search engine rankings
• Referrals, traffic from third party sites that link to the site in question
• Paid traffic, traffic that has been paid for.

In my experience, it is best if the majority of traffic comes from organic search engine rankings, unless otherwise noted in the sales letter. Some websites use paid traffic to generate revenue. Why are referrals and direct traffic worse from a buyers point of view? Because they can be easily manipulated. Think of a webmaster who owns a high traffic website and the site that you want to buy. The webmaster might have added a link on his high traffic site to the other site to increase the site’s traffic. Chance is, that link will not be there anymore once the site has been sold, unless part of the agreement.

Another aspect to look after are the keywords that the site ranks for. A site that sells TVs via Amazon’s affiliate system will earn less per visitor if the main keywords are not TV related.

Verdict: Go for sites with organic traffic of 60%+, the more the better.

4. The Payment

When in doubt use Escrow or a comparable service. It is always alarming if a seller does not offer Escrow, especially if you are prepared to pay all of the fees (try negotiating to split the fees). What’s Escrow? It is basically a service that acts as a middle-men for both parties. You send the money to Escrow who park it until you have received the services or goods that you ordered from the other party, in this case the domain name, website and all other assets that are part of the agreement.

Verdict: Use Escrow to make sure you get the website and data after making the payment.

5. The Revenue

As with traffic, there are good and bad revenue streams in terms of verification. Good revenue streams are not easily faked, like Adsense or Affiliate earnings. Bad revenue streams are private ad sales or one-time deals. Would you buy a website for $1,000 Dollars because the seller claimed to have received $100 per month for the last twelve months for placing a link on the website?

Another aspect that gets often overlooked is the availability of the services used. Amazon for instance blocks people from several US states from becoming an affiliate. It would be pretty bad if the website you bought made use of Amazon affiliate links.

Unless you already have an account, you should check the requirements for opening an account prior to bidding for a website.

Verdict: PPC or affiliate based offers are the most reliable revenue types. Do not bid for sites with shady or unprovable revenue streams.

6. Verification

The first thing that web investors need to do when they spot a potential investment is to verify the claims of the seller. How is that done? Start with a simple whois to see the website owner and administrative contacts. It is a good sign if they match the seller’s profile. Some website selling business sites like Flippa run their own verification system to verify a seller’s phone number and other data including Google Analytics data.

You can also look up the seller on the Internet, or use a reverse IP lookup script like ewhois to find out more about the seller’s other businesses.

Two key areas are left for you to verify: Revenue and Traffic. Traffic can be easily verified if Google Analytics is used. Ask the seller to add you to the account to get a first hand look at the site’s traffic. For revenue, it is not nearly as easy. Screenshots are fine but they are easily faked. Ask for video proof or a screencast session to see the earnings in realtime.

Verdict: Verification is very important and one of the first steps in validating a seller’s claims.

7. Niches

The best website niche is one that you have expertise in. While it is nice to sell high tech TVs on an affiliate website, it may be better to operate a site that you are familiar with. Why? Because you may get comments or questions by potential buyers. Should I get an LCD or Plasma TV, or a 3D TV? You may end up losing credibility if you cannot communicate with your buyers. Even worse, they may buy somewhere else and leave comments about your mediocre service on the Internet.

It is not really a necessity to buy a website in a niche that you are proficient in, but it can help you in the long run. Being proficient is also interesting when you add new content to the site you have just bought. New TVs coming out? Pick the best and add them to your store or site.

Verdict: Pick a niche that you are proficient in if possible.

8. Time

Would you rather buy a website for $900 that earns you $80 per month but requires you to spend one hour working per day, or a site for $500 that earns you $40 that runs on its own. The first site may look like the better deal, as it earns more per Dollar that you invest. But it also takes away 7 hours per week or 28 hours per month. And that makes it a very bad deal. First, your time is limited. If you only buy websites that require your attention, you will end up with a handful at most.

So called passive websites require almost no attention. It usually pays of to monitor the earnings and traffic, and to publish new contents a few times a month, but that’s done in less than an hour per week. That leaves ample room for many more websites.

Verdict: The less time it takes to maintain a website the better, unless you can outsource.

Anything that I left out that needs to be mentioned? Let me know in the comments.

The stock market is different. You need to research stocks a lot before you invest your money. And that’s where the problems start. You could invest into a fund but would need to do research on that fund as well, or hand the money over to your contact at your bank and ask them to invest. If you are lucky, you may get a 20% or even 30% increase over one year. If you are unlucky, you may end with 0 Dollars. The most likely outcome is the +/- 20% range. If you get 20% you end up with 12,000 Dollars after one year, minus taxes and brokerage fees. You may also get a dividend on top of that. Problem is, you do not have the money yet. You need to sell your stock. (Please note that expert traders may have much higher returns, the average Joe on the other hand will usually end up with less money). And you do not get that extra 20% or whatever directly into your bank account.

Investing In Websites

Lets take a look at website investments for a minute. I’d like to share two first hand experiences with you. I bought a site about six months ago for 400 Dollars. It generated a revenue of approximately $40 per month from Adsense and Amazon. I paid another $200 Dollars to get guides and articles updated, and fresh contents on the site, and another $400 so far for SEO.

That’s an investment of 1,000 Dollars. The site is now raking in $60 Dollars per month and climbing to new heights ever since. If it sticks with 60 Dollars I will end up with 720 Dollars after one year’s time. That’s a 72% increase in the first year. If I would not have done anything it would probably have returned $480 in its first year, which is a 120% return on the investment.

The second site was more expensive. I paid 23,000 Dollars for it. It earns between $2000 and $3000 Dollars per month. I plan to do light SEO and content generation on that site for about 200 Dollars per month. My first year investment is therefor 23,000 + 2400 = 25,400 Dollars. The money I earn from the investment is conservatively $2000 per month, that times 12 is 24,000 which is almost a 100% return of my investment. Even if all hell breaks lose and the site drops to $1000 per month, I would still earn 12,000 from it which would be more than 40% return.

And that’s money that I get right into my bank account.

Websites rise in value not only if their revenue increases, but also if other factors change. And one of those factors changes without the user’s doing: Age. A track record of constant earnings over a longer period of time will usually result in a higher selling price.

Websites, like stocks, can crash badly. Most websites rely on Google, Bing and other search engines for the majority of traffic. A ban on Google could seriously hurt the earnings of a website. You’d still have opportunities like PPC but that would require another investment and thorough research.

It is still possible to burn all your money on a bad investment. I see offers for new websites with 100 visitors that are supposed to earn 1500 Dollars per month every day. You will encounter black sheeps among the sellers, which you often can get rid of by looking at a website’s track record of traffic and earnings. If the seller is only providing information about the last month or two, you can almost be sure that something fishy is going on. One of the tricks of those sellers is to drive extra traffic to the website in the first month to make it look like it is getting good traffic and earnings. Once you buy the site, the traffic stops and you end up with an almost worthless website. It is possible to spot those if you get access to the stats of a site.

I’m not saying that website investments are the best option for everyone. You need some knowledge in the field, not only when doing your research and evaluation, but also technical knowledge later to move the website and set it up on one of your servers or hosting accounts. I do all that by myself but you could hire someone to do the job. That again costs money.

For me personally, investments in websites are the way to go forward. I have the expertise to evaluate them and the technical know how to maintain them after they have been purchased.

If you do proper research, your websites will return between 40-100% of your investment after one year’s time. Even if it crashes in the search engines, you can still work on it to improve the rankings again.

That’s another difference to the stock market. Once you have made your purchase there, you are a passive bystander hoping for the best. With your website, you can actively promote and optimize it.

Here are two good sites to get you started with web investments: Flippa.com is probably the best known marketplace for web properties. You find many professional buyers and sellers there, and it is rare that you can make a bargain purchase there. It happens, but it is rare and you need to be fast. Despite its quality, you find many lukewarm and some fraudulent offers on that site.

A second place to buy domains is the Digital Point forum. You usually get less stats and information about a website, and more fraudulent or lukewarm offers because of this. Sites here tend to go for a lower price though and you may end up paying less. Some webmasters buy on DP, optimize for a month or so and sell for a premium on Flippa. That’s called site flipping.

You will find other sites where you can buy domains, eBay for instance or Sedo. Good sites there sell for a lot of money.

Where do you invest your money in?

The changes don’t come without a hefty price tag, however. Flippa will also be introduced with a new fee structure more expensive than SitePoint’s previous fee structure. Flippa will be charging a “success fee” similar to eBay’s final value fee. SitePoint has not yet announced whether or not they will be offering a marketplace for hosting, link sales, or scripts. User feedback made on SitePoint forums in regard to the change has been mostly negative. Many Twitter users are also spreading news of the change with retweets at the TechCrunch twitter account saying “SitePoint Spins Off Website Marketplace As Flippa, Upsets Users.”

SitePoint co-founder, Mark Harbottle commented, “If you want to come across to flippa and sell your site in the professional marketplace we’re creating for serious buyers, we welcome you with open arms. If not, please do go to digitalpoint. List your site for free and see if the old adage of “you get what you pay for” applies.” This commented shocked and appalled many Digital Point users, many of which felt the remark by Mark Harbottle was “unprofessional” and that it was a “low blow” to the DigitalPoint.com webmaster community.

Mark Harbottle also commented, “Meanwhile while you all whine and complain about the fees, the design, etc. the smart sellers are listing their sites on flippa.com and they are attracting the majority of the buyer interest,” which many SitePoint users found it not only hurtful for being called whiners and complainers, but also that this blow came after the announcement that fees will be rising. It came as a shocker that those who list their sites on SitePoint were insulted and told to leave if they don’t like the changes. This change comes at a key period in the US economy where consumer spending has hit only one point higher than the US all time low