The Deal You Want to Be True
There's a dangerous moment when you're analyzing a property. It's the moment when you stop asking whether it's a good deal and start explaining why it is.
I think most people who've been doing this long enough have caught themselves doing it. You like the neighborhood. You like the property. You've been looking for months. Maybe somebody else is interested in it, which suddenly makes you want it a little more. Maybe you've already mentioned it to your wife or your partner. You've talked about what you're going to do with it. In your head, you're already a few months into the project.
And then something interesting starts happening to the numbers. The $70,000 rehab starts looking more like $55,000. The optimistic comparable suddenly becomes the right comparable. Six months becomes four. The contractor who's worried about something is "probably just being conservative."
Nothing dishonest is happening. You're simply becoming the salesman. And you're selling the deal to yourself.
The funny thing is, I actually think that's exactly what has to happen before you invest. You HAVE to sell the deal to yourself. Nobody else can sell it to you.
Not the agent. Not the broker. Not the contractor. Not your partner. Not the guy who made a fortune on the property next door.
They can give you information. They can give you their experience. They can point out things you've missed. But it's your money. It's your risk. You're the one who has to be convinced.
The important question is HOW you convince yourself. A bad detective decides who committed the crime and then starts looking for evidence that proves it. A good detective has a theory and then tries to destroy it.
I think investors should do the same thing. Once you realize you really want a property, stop looking for reasons to buy it for a moment. Ask yourself: "What would have to be true for me NOT to buy this deal?" Then go looking for exactly that. Try to kill your own deal. Challenge the ARV. Add something ugly to the rehab budget. Assume the contractor finishes late. Look at the comparable that doesn't support your valuation. Ask what happens if rents are lower than expected. And listen carefully to the person who's ruining everybody's mood.
Because almost every deal eventually gets to that stage. The agent likes it. Your partner likes it. The contractor thinks it can work. Everybody is talking about the upside.
Then some miserable bastard asks why the comparable everyone is using has an extra bedroom, a bigger lot and a swimming pool.
You NEED that bastard. Enthusiasm is contagious. Unfortunately, so is confirmation bias. Once three or four people want something to work, they can very easily start helping each other explain why it will.
That doesn't mean enthusiasm is bad. You need optimism to invest in anything. If your goal is to eliminate every uncertainty, you'll eventually develop the safest investment strategy in the world: "Never buy anything."
At some point you have to take the risk. But I think there should always be a moment between "I love this deal" and "I'm buying this deal", where you make a serious attempt to talk yourself out of it. If the deal survives that conversation, great.
Now sell it to yourself. Because nobody else should ever be able to do that for you.
(Have you ever realized halfway through analyzing a property that you weren't evaluating the deal anymore - you were trying to prove yourself right?)
- Drago Stanimirovic