When it comes to buying real estate, we must never let our emotions take over the deal. The times that we do are often the times that we end up learning the “hard lessons”. I am sure that we have all learned this important lesson one way or another. Maybe it was in real estate, maybe the stock market, maybe it was a relationship, or maybe it was in choosing what items to buy at the grocery store!
Emotions can even play tricks on us; let me explain.
Have you ever bought something at a great price, sold it for a profit; then, right after you sold it, the item went up even more in value? How did you feel? Probably not that great! It has happened to me, and I felt like I had gotten kicked in the stomach -- I was sick.
Have you ever bought something at a decent price and, when the item went down in value, you sold it and cut your losses? Then, within a relatively short period of time, the item went down even more in value? How did you feel? If you are like me, we felt great. We might have even patted ourselves on the back about the great decision we made!
Wait a minute here, what just happened? We made money and felt crummy and we lost money and felt great? That just doesn’t seem right to me; but at the end of the day, that is precisely what emotions can do to any of us. Emotions really can play tricks on us in our investment lives.
I was working in a one-on-one situation with a young couple, Karen and Steve, as they were getting their real estate investments off the ground. I was coaching them, developing a plan and keeping them accountable to the plan. As part of our initial session, they shared a story with me about a deal that they had done where they had just barely broke even. They asked me if I would review the deal with them and help them understand where they may have gotten derailed in their maiden attempt to make a profit! After all, that is what the business is supposed to be about, right?
It reminds me of a story that my father told me when I was a teenager. There was a young man who wanted to start a business and went to his father to borrow some money to get the business going. After going into great detail about the proposed venture, the father finally asked, “Can you make any money?” The son replied, “Well, I think I can at least break even.” The father simply said, “You’re already there!” We are in the business to make some money; if all you hope to do is break even, then go watch Jeopardy and eat some cookies!
Anyway, back to Karen and Steve and the deal they had me review. After spending 30 minutes or so going through the deal details with them, it became very clear to me what the issue was. They let emotions dictate the purchase and they overpaid for the property. One of my recent articles dealt with the concept of Starting at the End (see the Article Archives on www.emitraining.com if you missed it). The final analysis was not that they sold the house for too little -- it was that they bought the house for too much. They should have started at the end and come up with a maximum offering price then stuck to their guns. I had them go through this exercise after the fact.
After looking at all the numbers and figuring it out, they realized that they should have bought the property at about $15k less than they actually did. The lesson for them was that they wanted the house more than they wanted a profit, and it should be the other way around!
The only other way to have made money was to not have spent as much in the process of the fix up. It is possible to over-improve. Not everything has to be perfect -- don’t be afraid to leave a project or two for the next owner.
The bottom line is that when we let emotions dictate a deal, we can fall into the trap of not running all the numbers and over-paying for the property. When we want the profit more than we want the property, we will make sure to start at the end, run the numbers, and stay true to the goal of profitability.
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