When the Numbers Don't Work

As a real estate investor, I tell people in the business that I am always buying. What I mean is that I will consider any property that is available for purchase, and if it seems like a good deal, I will make an offer. If it is a great deal, I won't hesitate. Some sellers want too high of a price based on the location, size, and condition. I don't waste time making an offer when their price and my valuation are too far apart, but I still think through the possibility. I like to contemplate lots of deals, because essentially nearly every property is worth buying at the right price. I know I can't buy everything, nor do I want to. But analyzing hundreds of deals and thinking through the numbers is something I have practiced so much it is almost automatic. When a property comes along that is priced well below the market value, I can spot it quickly and it is a simple decision to buy. It's easy to point to the great deals that I have purchased over the years and think they are the reason my investing career has succeeded. However, another factor is just as important: being able to turn down a deal when the numbers don't work.

I usually have a real estate transaction every few months. I get used to the rhythm of buying and selling. Sometimes, like in the fall of 2012, I bought two houses in a five week span, and three in three months. But other times a few months goes by without any transactions. During those periods, it can seem like nothing is happening in my real estate world. I sometimes get antsy and want to buy something. After all, my business is built on buying properties. But the truth is that I am still following the market and actively seeking quality deals, I'm just not finding ones that meet my qualifications for being "good enough."

During a recent conversation with a fellow investor, we talked about a particular house that he offered for sale in early 2014. It was an as-is, off the market deal, the kind that I like. I didn't buy the house at that time, because the price was higher than I wanted to pay. He asked me what my offer would have been, and I said probably in the $110,000 range. He then informed me that another investor paid $130,000 for it, renovated it, and sold it for about $35,000 profit. Good for that investor. I know that my minimum profit margins are higher than a lot of other investors, and I am okay with that. Ultimately, it means saying "no" to a lot more deals than I say "yes" to.

What is the deeper reasoning behind waiting for excellent deals and not just settling for good ones? Why do I require higher margins? I think it stems from a greater valuation of my own time. Because I place a high value on my time, I'm not going to manage a whole house renovation that lasts six months to only make $20,000. I'm not going to stretch for a purchase and hope that it ends up being profitable. There have been plenty of properties over the years that are right on the fence of being "good enough." They are pretty solid deals. But if I'm not totally convinced that it is enough of a discount, then I turn it down. I have learned that another good deal comes along. It requires patience and focus, but another opportunity always pops up. By waiting, I find better discounts, which means I make more money at the point of purchase. I don't have to endure a tedious renovation for an extra $20,000 when I can make that much through a more selective buying process.

It can be tempting to try to cheat on the numbers in real estate deals. When analyzing a purchase, an investor can inflate the future resale value by looking at comparable sales from a better neighborhood, or lower the estimates for improvements that need to be done. But if the only way to make a deal be good enough is to bend the numbers, then it really isn't that good. A few poor investment decisions can quickly erase the profits from many good ones. Many investors have lost tens of thousands on bad deals. When making projections for a potential property, don't let emotions become involved. Remember that the numbers don't lie. It's easy to say "yes" when they look good. Just as important is being able to say "no" when the numbers don't work.