Avoid These 5 Big Mistakes When Analyzing Deals
By Brent Roberts
I think youd agree that investors need to do their due diligence before they invest. No one should buy the first property they find without analyzing the deal to make sure it works. Instead, investors should gather the data, weigh the pros and cons, and act accordingly. But this is easier said than done. As a Realtor® I see five big mistakes that investors make when analyzing deals. Avoiding these mistakes could make the difference between a deal that delivers a return on investment (ROI) and a deal that doesnt.
Mistake #1: Analyzing the wrong things
When analyzing a deal, youll look at a lot of numbers. Sometimes the sheer volume of numbers can be overwhelming. You might think, great! Look at all this analysis Im doing when in reality youre pulling in a bunch of irrelevant numbers.
One example is an investor that uses home value trends to determine potential appreciation on their investment when they are really looking for cash flow. The appreciation is nice but its the wrong analysis to do when the investor should instead be looking at potential rental income.
Heres the better way: Identify the numbers you truly need for your analysis and hunt those numbers down.
Mistake #2: Gathering analysis from only one source
I havent met many investors who love the analysis piece of investing. Most investors I know prefer the cash flowing piece instead! So it can be tempting to cut the analysis short. If you have a lot of analysis you want to do on a deal, you might be tempted to find one number from one source and then move on.
For example, an investor might go to MLS to get some property sale prices of nearby properties, and then consider that part of the analysis complete. But its not complete, nor accurate (sales listings are not sold listings and there may be a huge discrepancy). The investor risks their ROI by looking to just one source. If there is an error in that source, or a bias that skews the numbers, then they introduce an error into their analysis.
Heres the better way: Identify the numbers you need and look to multiple sources for each number. If the number appears similarly across multiple sources (and as long as those sources are drawing from different sources), thats a good sign; if the number appear differently, its a sign to educate yourself about the disparity. For rents, cross reference what Kijiji, Craigslist and Rentboard list for properties similar to the one you are considering with what REIN Members are getting (ask them or look on MyReinSpace.com for answers).
Mistake #3: Ignoring context
Deals that make sense in one location dont always make sense in another location. Just because the numbers work in one city doesnt mean the same numbers will work in a different city. Even within a city, just because the numbers work on the north side of the city doesnt mean the same numbers will work on the south side of the city.
Im reminded of a story of one investor who bought his first property. He called his family to report his new investment. His family, who lived in a different province, in an inflated market, and who never bought investment property before, gave him this less-than-helpful opinion: You paid way too much. Every deal has its own context and the numbers of your analysis need to work for the context.
Heres the better way: Listen closest to the advice of others who share the same context. Become your own expert on the context youre investing in and trust that analysis over analysis drawn from anywhere else.
Mistake #4: Impatience
Youre an investor. You want to invest. Its hard to sit on the sidelines, when you have access to capital, and just crunch numbers on one deal after another. But you need to remind yourself that the numbers will guide you.
Investors may feel FOMO (Fear of Missing Out) because others in the network are making investment purchases. Believe me, as a Realtor®, I want to sell you a property, so it is just as hard for me to sit on the sidelines too, but like you, I have a vested interested in the long term (be it the property or our relationship).
Heres the better way: Remind yourself that your analysis is part of investing, its not an annoying precursor to investing. Establish criteria that your deals need to meet before you invest and dont let your impatience sway you from those criteria.
Mistake #5: Using the analysis only for go/no-go decisions
Investors can get locked into one way of thinking. They might gather data and analyze them, and then use that analysis to help them make a go/no-go decision yes, they should go ahead with the deal or no, they shouldnt go ahead with the deal. But investing is not always a yes/no decision. Sometimes the numbers dont work for one type of deal but it will work for a different type of deal.
I knew an investor once who was fixated on flips. He would buy, fix, and sell. He admitted that it was a business model he didnt love and couldnt easily scale but its all he knew. And there were a few times when I watched him turn down really good deals of turnkey rental properties that could have helped him smooth out his cash flow a bit.
Analysis should be used to give you more information about a property so that you can decide how to move forward. It might be a go/no-go decision but your analysis might inspire you to consider other exit strategies as well.
I think most investors would agree that analysis is important. But we consider ourselves investors, not analysts, so its easy to muddle our way through the analysis to get to the fun part of the deal. But if you take some time before the deal to do your analysis, and if you avoid the mistakes Ive listed above, youll enjoy more deals and better deals. Remember, Don R. Campbell always says that investing in real estate should be boring and that the results of the investing are what create the means for excitement.
Brent started to invest in real estate and bought his first door at the age of 18. Brent owned 18 houses prior to becoming a Realtor®. He decided to take the real estate course in the late 1980s to become a more educated buyer. He was then convinced to become an agent and has never looked back. Contact Brent at [email protected].