The snowball effect is a phenomenon that can take a person from point A to point Z in a hurry, but it can move in reverse just as easily. The snowball effect, of course, is the idea that one small event can produce more significant events, which in turn can produce even more events of even greater significance; just as a snowball picks up mass as it rolls down a hill. It occurs with positive events, leading to great achievements, or negative events, resulting in collapses of great proportions. The snowball effect is not a naturally occurring phenomenon though, it requires initial successes to jump-start the process, and attention during the process to ensure it stays on track, but the effects can be very powerful in building a business.
New real estate investors are often discouraged by the pace of business growth, especially considering the lofty goals most investors set after dreaming of a real estate empire. The discouragement often leads to a fizzing out or an abrupt end to an investing career, often because each victory was celebrated separately, instead of tied to the sum and built upon properly.
Here are some examples of how the snowball effect can work:
After thoughtfully developing a business plan and saving a large portion of his salary, a new rehabber with enough money saved for one deal finds and purchases a property to rehab and sell. He closes on the property and puts his team to work immediately, finishing the project near the estimated completion date and on-budget (good thing he built-in some contingency funds). The project was a huge success, netting the rehabber a nice profit.
Instead of withdrawing the funds for personal use, the rehabber uses the funds to purchase two more projects. As his business moves forward, he encounters more contractors and other key personnel, helping him complete the projects quicker. Additionally, he learns the tricks of the trade and hones his deal analysis skills. Now armed with available funds, better contractors, more profitable deals and priceless experience, this investor has the snowball rolling in the right direction.
After staying up late and watching a real estate guru sales pitch, investor X is ready to make a fortune in real estate. He thinks back to those home flipping shows he used to watch on television . . . “how hard could it be?”
This new, self-proclaimed rehabber pulls out the yellow book to find an agent that can help him snag a good deal. He explains to the real estate agent what he is looking for, a house he can purchase, renovate and sell for a huge profit, just like on television. Within 45 days this rehabber has closed on a property and is ready to go to work. He does not have contractors lined up yet, but finds a handyman in the classified and hires him to do the work. The property is finished several months later, but the costs far exceeded estimates and some of the work is shoddy; worse yet, the after repair value is not what the real estate agent claimed it would be. After losing what little money he had, investor X decides real estate investing is too difficult and decides to give it up.
Prognosis of the Snowball Effect & Real Estate?
Certainly these examples are over-simplified and exaggerated, but they illustrate how easily a good situation can become great and a bad situation can dissolve into a terrible one. Furthermore, they highlight the importance at looking at successfully completed deals or steps as part of a bigger plan, not as individual, unrelated events.
So next time you complete a deal or make a business decision (big or small) take some time to think about how it might shape the future and consider steps you can take to amplify the snowball effect when it is going the right direction and reverse it when it is not. I look forward to comments about how the snowball effect worked for or against you in real estate, so please chime in if you have one!