Posted over 7 years ago

Don’t Force the Issue – Block out Emotion from your Rehab Analysis

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Whether you’re a beginning rehabber or someone with several deals under your belt, we all get that feeling: The feeling of anxiety and urgency to find your next (or first) deal. This is a natural feeling in this super exciting field of residential rehabbing. If real estate is truly your passion, you’ll spend countless hours daydreaming and fantasizing about the perfect rehab project: Getting a lead from you perfectly executed marketing campaign, negotiating the perfect deal from the motivated seller, executing a flawless rehab, and selling for 10% more than your estimated ARV! It all looks so good in our head and we can’t wait to get started.

The passion we feel for real estate investing is a powerful weapon when it comes to adding real value to the regions in which we operate our businesses. This passion drives us to read more books, knock on more doors, call more contractors, and work harder on our rehabs. Passion and excitement for real estate are truly essential attributes for any successful real estate investor.

However, the passion you have for real estate has the risk of acting as a double-edged sword. Unfortunately, its possible and often likely for your excitement for real estate to drive you into bad deals and undesirable situations. During the hustle and bustle of your life as a real estate investor, its essential to keep a level head and allow your business processes to dictate the deals with which you engage.

Below are a few essential tips for keeping a level head and reducing the role that emotion plays in choosing your real estate deals:

Tip #1 – Trust the Numbers

You have an investment analysis tool for a reason. Real Estate investors who have come before you have come to the realization that you can’t analyze properties in your head. You may be able to run some of the numbers, but you need a structured, formalized process for deal analysis that drives your investment decisions.

Seasoned investors may balk at this notion, siting their years of experience as the reason they do not need to use formal analysis tools. While experience will certainly help you quickly validate deals in your head, you cannot be 100% confident in the health of a deal without running the numbers through a formal tool.

Perhaps just as important as trusting the numbers is not ignoring numbers and attributes that may negatively impact your deal. As discussed in Avoiding 3 Common Pitfalls to Nail your ARV, its common for investors to ignore undesirable “quirks” in their properties. It is essential that you remain honest with yourself in conducting a comprehensive analysis to account for all variables.

You are only hurting yourself if you avoid negative deal attributes to pad you estimated profit.

Tip #2 – Establish Firm Criteria for “Go”/ “No Go” Areas and Neighborhoods

Every market has areas and neighborhoods that make more and less sense for different types of investing. In addition, every investor has a varying degree of market knowledge when moving throughout different areas of the region. When establishing your rehab strategy, it is essential that you identify the areas and neighborhoods that meet your project criteria. Before looking at any “live” deals, you should know what geographic boundaries will be acceptable when looking into potential projects.

Once you have identified the towns and neighborhoods that meet your investment criteria, assign a strict “No-Go” classification to those that do not. This “No-Go” classification can be viewed as a “Veto Power” held by your investment criteria. Even if you run all the numbers and it looks like a good deal, properties with the “N0-Go” classification should absolutely not be taken on. Its essential that you establish this classification up-front. This allows for un-biased assignment clear from the influence of the excitement and emotion of a potential deal.

Do not be shy in communicating your “No-Go” classification with wholesalers and motivated sellers. Nobody likes when others wast their time. If you are not clear about your geographic criteria with your network of investors and your potential sellers, you stand the risk of wasting their time discussing deals that have no shot of passing your qualification process.

When sharing your criteria, you need not be rude about it. Simply state that your company does not invest in that specific area at this time. If you receive a lead from a motivated seller, you should go above and beyond simply saying: “No, we don’t invest there”. Offer some resources on the next steps they might take to get their home sold. Better yet, take on the role of a wholesaler and try to connect the seller with another investor who is interested in the subject neighborhood.

In the end, honesty is the best policy. Stay out of areas that do not fit your criteria. Do not let the emotion of an exciting deal break your process.

Tip #3 – Don’t Speculate

A combination of the first two tips is to avoid speculating in areas that do not have true historical data to warrant solid investments. Put more simply, rely only on actual figures and stick with your “No-Go” criteria until historical data warrants it applicable to consider otherwise.

Every market has those neighborhoods that are “on the verge of turning around”. Maybe its a new business, restaurant, park, school or government funded program that leads us to believe we are on the cusp of a boom. Its very easy to hop on the bandwagon of excitement that is bound to become associated with areas like this. Regardless of how promising these potential turnarounds may be, its essential to fall back to your analysis that relies on factual historical information.

But what if I miss out? Perhaps this is the notion that leads you to invest in one of these turnaround areas. To this we say, “So what!”. There are plenty of good deals in areas and neighborhoods for which we have strong historical data to support our analysis. There is no reason to risk your investors’ money by plowing into a neighborhood that “might take off”. Its true that you might miss the early boat to the promise land. But don’t let your envious feelings get the best of you.

Be confident in analysis process and don’t let the hype shake your level head.

Delayed Gratification

The excitement of engaging in a real estate deal is hard to pass up. We urge you to step back and call upon your patience. The excitement you feel will ware off quickly if you invest in a losing property. Its far better to wait it out for a deal that fits your criteria. Don’t force it! Deals will come. The excitement of purchasing an exciting process is nothing compared to the jubilation of cashing out on a sound, solid investment!