Sometimes your best real estate deal may be the one you don’t make. As real estate investors we are always looking for the next “perfect” opportunity. You look around and see potential everywhere and are afraid of missing out. If you aren’t careful it can lead to a fatal case of gotta-do-a-deal-itis.
In your quest to stay in the game you may convince yourself that a marginal deal is one worthy of your attention. Even worse, you may find yourself ignoring warning signs about the potential investment or the market as a whole. When you are knee-deep in the investment world it isn’t always easy to remain objective but your long-term survival depends on it.
Case in Point
A couple of years ago I was offered the opportunity to partner on a rehab deal. Another investor had found what seemed like a great opportunity but was short on cash. I had cash looking for an opportunity so I looked at the deal. It was an REO (foreclosure) in a blue-collar section of Las Vegas. It was an area that had reasonable demand and there was enough of a profit margin in the deal to make it attractive. I was in and we moved ahead with the plan.
The Las Vegas market had started to slide and we were aware of it. We built the expectation of a lower sale price into the numbers and it still worked. An alternative exit strategy was to hold the home as a rental for a short time if necessary. The rental market was strong enough to allow for our costs to be easily covered but it would mean that our capital would be tied up. Still we considered this to be a worst-case fallback option.
As we moved forward things started to go wrong. The financing we had arranged and had pre-approved fell through. The lender had changed its guidelines and would no longer do the deal. We found another lender who would do it, albeit with a larger down payment, but no sooner had we agreed to it that it too collapsed.
When the second lender pulled out we took another look at everything. On the surface it didn’t make sense. We were experienced investors with a track record and solid financials and the deal penciled out on paper. Lenders had become extremely skittish, even hard money lenders weren’t eager to commit. What were we missing?
It was a case of not seeing the forest for the trees. We were so focused on the tree that was the individual deal that we missed the forest, or overall market condition. The lenders were changing the rules so quickly because the market was collapsing all around them. We decided that the best course of action was to let the deal go.
A Better Deal
Hindsight tells us that we were witnessing the beginning of a steep and prolonged decline in the real estate market. Had we done that deal we would have been upside down by the time it was completed. The only real option would have been to rent it out until the market recovered. How long that would take is anyone’s guess, but it would have been a very bad deal.
Not buying that property left me with cash for another opportunity. Several months later I had the opportunity to purchase a house from an estate for pennies on the dollar. Ultimately, not completing that Las Vegas purchase was one of the best investment decisions I have made. If you find yourself itching to make any deal just to have a deal, remember that doing nothing may be the best option.
Risk comes from not knowing what you are doing. – Warren Buffett