Some Deals Just Don't Work In Excel

[Drago Stanimirovic]

There's a point in this business where the spreadsheet stops being enough.

That doesn't mean spreadsheets are useless. Quite the opposite. If the numbers don't work, I want to know why before I do anything else.

But eventually you come across a property where Excel says mediocre and somebody I know who's been doing business in that market for twenty years says: "I'd buy it." Or everything on the spreadsheet looks beautiful and the same person says: "I wouldn't touch it."

That's where things get interesting. A spreadsheet can only calculate what you put into it. It knows the purchase price. It knows the rents, taxes, insurance, rehab budget, interest rate and projected ARV.

It doesn't know that nobody wants to live on one side of that particular street. It doesn't know that tenants in this neighborhood will happily pay more for a garage, while tenants three miles away couldn't care less. It doesn't know that the contractor you're budgeting four months for has never finished anything in less than seven.

And it certainly doesn't have a column for "This guy always gets it done." I've seen borrowers bring deals that look almost identical on paper. Same LTV. Similar experience. Similar projected returns. But. One makes you comfortable. The other doesn't.

Why? Maybe you've seen the first guy deal with bad news before. He answers the phone when something goes wrong. He puts his own money into solving problems. He doesn't spend three days figuring out who to blame.

What's that worth? I don't know. And that's precisely the problem. You can't put everything that matters into a cell.

This is usually where somebody says: "That's what experience is for." True. But experience is a tricky thing. We talk about experience as though it's some universal currency that simply accumulates over the years. I'm not sure it works that way.

Experience is incredibly specific and incredibly local. You can have twenty years of very credible experience in your town, your market, your particular corner of the business. You know the contractors. You know the streets. You know which neighborhoods look identical on a map but absolutely aren't. You know what rents people actually pay instead of what somebody's spreadsheet says they should pay. You know which properties sit and which ones disappear. You know, as the Rolling Stones put it, "your way around". That's real knowledge.

The problem starts when we assume that knowledge travels with us. Drive two towns over and suddenly you may not know your way around nearly as well as you think you do. Something that's worked twenty times in your neck of the woods might work there too. Or it might not.

Different tenants. Different buyers. Different contractors. Different permitting. Different insurance. Different expectations. Something that adds $20,000 of value here may add nothing there.

And that's where experience itself can become dangerous. A beginner at least knows he's a beginner. An experienced person has evidence: "I've done this twenty times."

Fair enough. But have you done it twenty times here? I think that's a question experienced people need to ask themselves more often.

There's also the old advice to "trust your gut." I'm wary of that too. Your gut may be twenty years of pattern recognition telling you something your spreadsheet can't see. It can also be confirmation bias wearing a nice suit.

There's a big difference between "I have a bad feeling about this deal" and "I've seen this combination of tenant profile, rehab schedule and exit strategy fail three times before." The second deserves serious attention.

But even then, there's one more question: "Where did you see it fail?" 

Experience should absolutely be part of the calculation. Just don't confuse experience with omniscience. The numbers should earn a deal the right to be considered. Experience helps you understand what those numbers actually mean. And local knowledge tells you whether your experience applies in the first place.

So use the spreadsheet. Use your judgment. Use everything you've learned from the deals that went right and, especially, the ones that went wrong. But the moment you leave the territory where you genuinely "know your way around"... Be wary. Be very wary.

(Have you ever taken something that worked perfectly in one market and discovered, perhaps expensively, that the same rules didn't apply somewhere else?)