If you ever get a chance to read my posts on the BiggerPockets forums, you notice that I am a big proponent of education, mentor ship, coaching, whatever you want to call it. I call it surrounding yourself with people you want to learn from and always learning something new. One week ago, I had the chance to travel to Boston to attend the Hubspot Inbound ’12 conference and do both!
Before tying this into real estate, I think it’s important that readers understand that there is so much more to building a business that simply identifying something you want to sell and then finding a buyer. There is so much more to real estate that simply finding some piece of property you want to buy and buying it. That is what I love about going to conferences like Inbound ’12 and surrounding myself with people that (mostly) know nothing about my business. Once I am around them and start to tell them about my business, they provide some of the best insight you could ever hope to get. One of the people I was lucky enough to get to hear speak was Rand Fishkin, CEO of SEO software company, SEOmoz, who gave an entertaining talk about irrational behaviors and beliefs in the SEO world. His presentation got me thinking about the same irrational behaviors that real estate investors exhibit. His talk helped me focus in on one irrational behavior that I though stood out above all else – especially in my particular niche of real estate investing.
Irrational Behavior Of Real Estate Investors
Rand opened his presentation with an analytical comparison he had done on a dating website called okcupid.com. If you’re like me (I was in the audience wondering what it had to do with SEO), you might be wondering what this has to do with real estate investing. Well, he walked through his analysis and had some very amusing points to make about the differences between men and women on the site, most of which, any of us could guess. It was a great segway into the rest of his talk on website SEO and marketing. His main point on his dating site analysis was that men and women both are extremely picky and borderline irrational with the way they approached contacting other users and finding a date. Both men and women approach the site differently with men being irrationally focused on looks and women being irrationally focused on height. Both behaviors that could actually lead to men and women missing out on a great number of possible matches. Many of those matches could be based on some solid fundamentals to an online dating site. That doesn’t mean it’s bad to be picky, it just means that being picky about the wrong things or in the wrong order can hinder the search for a great match. Stay with me, I’m going to show you how this relates to real estate investing.
His research showed that a majority of women used a completely arbitrary height requirement, 5’9″ to be exact, to filter their possible dating selections and this height requirement comes very early in the process. For guys like Rand and myself who are challenged to reach 5’9″, this can be a very tricky thing. Women exclude men who are not at least 5’9″ long before they find out if they are handsome (?), fit and athletic (?), college educated (?), do they read books (?), did they fill out a compete profile (?). Heck, they even find out how tall a man is before they know if he has a job! They never see the other analytical data because these criteria come after the height. For men, it looked even crazier as they focused almost exclusively on looks and a rating system for looks before choosing who to interact with. I know that comes as a complete shocker, right! Rand’s point was that to base your decision on whom to date on a completely arbitrary filter was, well, a little irrational.
So as I was thinking about how this relates to real estate investing, I didn’t have to think very hard. I get phone calls and emails on a weekly basis from interested investors with the same headline “I hear I can buy cheap properties in Memphis”! They don’t send emails asking about the economy. Rarely do I get an email asking about a rental analysis for certain areas. I can’t think of the last time I received an email asking me about property management as it relates to the best zip codes for investing. I hardly ever get asked for examples of a ‘Scope of Work’ detailing how we show investors the renovations done to a property they are purchasing. No, I pretty much get contacted like clockwork with the request for cheap houses.
That is not to say that I never get contacted about the real pertinent information. It just happens a lot less often.
Cheap in relation to what?
I always ask investors who send me requests or even make statements like that about cheap housing stock, “cheap compared to what”? Cheap compared to where you live? Maybe. I started my investing career in Denver and used to find houses there that would cost me $120,000. I could buy a comparable property in Memphis for $50,000. So naturally, I thought the Memphis houses were an incredible bargain. I mean, they were half price right! Wrong. I would later find out that what I paid $50,000 for, the smart investor who knew the area had paid $30,000. I was almost double what other investors had paid and when the housing crisis hit and rents softened, I got hurt the most.
Since 97% of my investors come from outside of Memphis and Dallas, I have to tell all of them that cheap compared to where you live is not a good indicator of a quality investment property. Cheap even compared to where your investing is not a good indicator of a quality investment property. You have to dig deeper and get to the meat of the analytics. Too many investors fixate on price and fixate on price long before they know anything about the city, the neighborhood itself, the economy, the team they will use to help them successfully invest, etc… They simply decide that since it is cheap compared to where they live it must be a good deal or at the very least a better deal than they can get at home. The best advice I can give an investor interested in my area (really any area for that matter) is that there is a lot more that goes into your investing decision than price and price needs to come later in the analysis. Long before you can decide if the price is right, you have to know the area, the economics of the area, the factors that hurt and help an area and, if you are investing out of town, how the people you partner with are going to help you to make your investment a good one. These are factors that have nothing to do with price, but yet, they have a much greater effect on your investment than the price does. When you feel like you have the right location and team, then you can focus on pricing and how pricing effects your investment.
Investors who make decisions on investment property simply based on if they think the property is ‘cheap’, completely ignore all of the analytical data that should come first. Investors have choices today in how, when and where they choose to invest in real estate. For an investor, man or woman, new or experienced, to focus in on the pricing of an investment and not even consider other properties that do not meet that criteria, leaves them open to missing out on investments that may be perfect for them if not for that one irrational filter. My advice, on real estate not dating, is to be open to the possibility that your best investment may be the one where you consider price last.
Photo: bigbirdzThe Number One Irrational Behavior of Real Estate Investors by Chris Clothier